high deductible health plan pros and cons

Understanding the Pros and Cons of High Deductible Health Plan

One of the prime reasons people find HDHP appealing is because it offers individuals an option of making lower monthly payments. With lesser premiums, people can save more money to meet other necessary expenditures. In fact, the reason HDHP has been adopted by so many people since its inception in 2004, is because of the perception that it cuts down the monthly cost of medical expenditure.

People who need frequent medical attention or are undergoing treatment for major illness need to spend their own money on treatment. In these cases, where the medical cost is higher, the entire savings of an individual will have to be used to provide treatment. Even after meeting the deductible, the person will have to pay a part of expenditure as co-insurance till the out-of-pocket limit is reached.

High-Deductible Health Plan - HDHP

What is a 'High-Deductible Health Plan - HDHP'

A health insurance plan with a high minimum deductible that the insurance holder must pay for medical expenses before insurance coverage kicks in. The minimum deductible for a plan to fall into the category of an HDHP varies each year. For 2017, it was $1,300 for individuals and $2,600 for families. In 2018, it rises to $1,350 for individuals and $2,700 for families.

BREAKING DOWN 'High-Deductible Health Plan - HDHP'

These health plans became more common when the new health savings account (HSA) legislation was signed into law in 2003 [see Pros and Cons of a Health SAvings Account (HSA)]. In order to open an HSA account, an individual must first have an HDHP. These high-deductible health plans are thought to lower overall healthcare costs by forcing individuals to be more conscious of medical expenses.

The higher deductible also lowers insurance premiums, making health coverage more affordable. This benefits healthy people who need coverage mostly in case of a serious health emergency and can take advantage of HSA savings for retirement as well as any health needs now.

High Deductible Health Plan Pros and Cons List

If you always stay tuned on current news stories, then most probably you have heard rearing discussions on high deductible health plans. This type of health plan has been the subject of debates these days because of the low premiums it provides. Though this benefit seems like an attractive selling point, there are still other aspects you need to consider in order to determine if a high deductible health plan is a good option for you to take. Here are its pros and cons:

List of Pros of a High Deductible Health Plan

1. It is perfect for young people.

More often than not, young people are not concerned about the serious illnesses they might have and would only apply for health coverage when something happens unexpectedly. The probability of health expenses is much lower among the youth, and this group feels that a high deductible health plan would give them sufficient coverage. Moreover, it would allow them to save on medical costs in the long run.

2. It requires lower monthly payments.

One huge advantage you can gain from a high deductible health plan is the much lower monthly payment for medical coverage you have to pay. With this plan, your monthly premiums will be much more reasonable, and you can actually save back some of your money for the future in the event when you need to pay for your high deductible. Since this program was introduced in 2004, it has been a popular way for people to save money on health coverage.

List of Cons of a High Deductible Health Plan

Though a high deductible health plan comes with low premiums, its low monthly payments could increase over time. And when the payments go up, this program would no longer be beneficial for your medical expenses. So, it is important to know how its premium rates will rise before choosing such a plan.

2. It is not suitable for those having frequent health needs.

If you have a long-term health condition or recurring medical needs, this plan is definitely a bad choice for you. By using it, you will be obliged to comply with the high deductible often, with your own money used to pay for all the expenses. In this case, you might want to take out coverage with a lower deductible, lowering your payment obligation.

3. It can put you into financial difficulty.

With a high deductible health plan, you might find yourself exceeding your contribution limit per year if you have a health crisis. This has happened to families who had contributed to high deductible health plans, which led to loss from high post tax dollars. Nevertheless, this issue can be mitigated if your out-of-pocket maximum required would not exceed the limits held under the plan.

Deciding if a high deductible health plan is the best option of a medical coverage for you to take is surely difficult. There are many factors that you need to take into account, which means you should be fully aware of it. But with the pros and cons listed above, you should now have the knowledge to come up with a well-informed decision.

High-Deductible Health Insurance Plan Plus HSA

Should you move to a high-deductible health plan?

General Motors recently announced that they are moving towards higher deductible insurance plans.

Such things wouldn't normally be news worthy.

But here we are in the middle of a government controlled health care battle.

Every piece of health care news seems to have an impact.

So, should you consider moving to a high-deductible plan, if given the option? Odds are if GM (who traditionally has “Cadillac” insurance plans…pun intended) is moving towards higher deductibles, your company will be too.

Therefore, you should likely be ready to make this decision for yourself when the time comes.

Below I'll present an example of someone who's making the move. I'll also provide some pros and cons of such a move.

Moving to a High-Deductible Health Plan: An Example

I have a friend who's current health insurance plan (covering him and two kids) is costing him $614.63/month with a deductible of $500 and a $20 copay. He's considering a new policy: $278.08/month with a deductible of $5,600. His tax bracket is 25%.

He calculates that the savings on his monthly premiums will be $336.55/month, which is $4,038.60 in a year. That's incredible savings on the premiums alone! He's considering using a Health Savings Account (HSA) to stash the difference in plan costs.

But he knows he can't stop the analysis there. He factors in estimated usage: best case, he says his medical cost for all three people including dental and prescriptions would be $2,000. He's a young guy, so I'm sure that's fair.

Under the new plan, he'd have to pay all of this $2,000 out-of-pocket, or out of his newly opened HSA. So the $4,038.60 in premium savings minus $2,000 actual medical cost plus $500 in tax savings using the HSA equals estimated savings of $2,538.60 per year. Pretty good, right?

He says the worst case scenario would be that he has $5,600+ in medical expenses. He gets 25% tax savings, so of the $5,600 deductible, he would only spend $4,200. His other deductible was $500, so to compare he can subtract $500 from the $4,200 to get $3,700.

Which compared to $4,038 (saved above) would give him an actual difference in yearly cost of $338.60 to his advantage. Basically, even if he pays his entire deductible, he comes out ahead.

My friend goes on to say,

“Even in the 15% bracket, my worst case would be that I paid $221.40 more a year than I would have with the other plan, which I believe is worth the risk when the savings are so big. Plus I can roll over from year to year and could get an interest-bearing Health Savings Account.

As long as I keep it funded correctly (paying the difference in premium to the HSA until I have it where needed, it should be a great financial situation for me. Once I get it fully funded, I can take the money that I was spending to fund the HSA and put into savings, a Roth IRA, etc.”

High Deductible Health Plan Pros and Cons

Okay. Let's extract from my friend's example some of the pros and cons his decision:

Will you save on premiums? In the example above, the answer was “yes”, and in a big way.

What's your estimated usage? I like the way my friend used an average and then compared it to the maximum estimated spend. It might be prudent to break out last year's actual costs to provide some more perspective.

Should you be trusted to setup the HSA and contribute? My friend seems to think that would be a easy thing for him. And I agree. The fact that he's even taking the time to make this calculation shows he's got the initiative to make the savings happen. And he's obviously had the money each month if he's been making that kind of payment. There are some eligibility rules for HSA you should know about. I may discuss that in a later post.

But what are some other things to consider?

Are You Getting Similar Coverage with the New Plan? My friend didn't mention a couple of things when discussing his old plan vs the new one. The maximum annual out of pocketallowed and the difference in the actual coverage of the plan. If he didn't already, he should go back and factor those things in.

Are you healthy enough? If you're already maxing out your current plan and you have some serious health issues that require prescription drugs, odds are a high-deductible plan isn't for you.

Are you about to try to get pregnant?

Do you have pre-existing conditions? On an employer plan, pre-existing conditions aren't a problem. Moving to a high-deductible plan will create a re-start in your coverage and the insurer is likely to charge you more for those pre-existing conditions.

Where to Find a High-Deductible, HSA-Compatible Plan?

I was doing some research of my own the other night after I learned of my buddy's situation above, and I stumbled upon a nice website that will quickly provide quotes for high deductible insurance plans that are also HSA-compatible.

I was surprised at the nice rates, the quality insurance companies listed, and the speed with which my quote was turned around (instant). It's called eHealthInsurance.com.

What's your take? How do you feel about the analysis done above in my friend's example? Have you or are you considering a move to a high-deductible plan? Share your experience below…

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Philip Taylor, aka "PT", is a CPA, financial writer, podcaster, FinCon Founder, husband, and father of three. He created PT Money back in 2007 to share his thoughts on money and to meet others passionate about managing their finances. All the content on this blog is original, and created or edited by PT. Read more about Philip Taylor, and be sure to connect with him on Twitter, Facebook, or Google+. Listen to the new podcast, Masters of Money!

One challenge with this is companies that switch to a high deductible plan usually don’t pass the savings on to you, the worker! When my church switched to an HSA model, they pocketed the difference, so obviously the high deductible was VERY BAD for me, financially.

Very timely write up given open enrollment season is now. HSA and FSA, both are good. Generally, one just have to ask themselves how healthy they think they are, and deduct accordingly.

There’s always something you can buy to use up your FSA. Contacts, sunglasses, stock up for medicine. Just don’t beef it up like crazy!

Hope to see you at Financial Samurai one day!

Awesome write up.

Unfortunately, my employer does not offer HSA’s but FSA’s instead. The FSA is a burden to try to “work out” perfectly – it’s definitely created to profit the company and not to help the individual. We do use it, but we have to be diligent to predict the correct amounts.

I’m going to my plan director here at work right now to see if we can start offering HSA’s! They just make so much more sense.

Good analysis. I did my own, as our open enrollment period ends today.

We have an extremely generous HMO. The family rate is $225/month. Our copays are $20 for our regular practitioner and $30 for a specialist.

Lab work, tests, surgeries and more are covered 100%. When I had my son, our entire bill was $280. That was for prenatal visits, ultrasounds, labor, time in the hospital — everything.

Under the deductible insurance option my husband’s employer offers, we’d have to spend $5,000 OOP before their benefits kicked in, and they’d only cover 80% of whatever costs.

That’s a LOT more than we spent last year.

We are sticking with our HMO as long as it is offered, even if we could potentially save $1000 per year or so by going another route.

HSA plans are definitely the way to go. One aspect not discussed here is the ability to use an HSA as a “super Roth” investment vehicle, with no taxes paid on money going in or out of the account, including investment earning. I am not spending any of my HSA money until I retire. I wrote a post about how to do this some months ago.

High Deductible Health Plan Pros and Cons

Health insurance is becoming necessary around the world, which means some people have to purchase insurance for the very first time in some instances. Not everyone needs the same level of insurance as others do, which is why some people may consider the purchase of a high deductible health plan. These health plans often cover many minor issues with small co-pays, but with major issues, such as a surgery, much of the cost would have to be paid by the patient. In return, these plans often have a lower cost.

Here are some other things to consider about a high deductible health plan:

Additional Pros of Carrying a High Deductible

If you are in reasonably good health and just see the doctor for routine health issues, like a sinus infection or a sore throat, then you can get the care you need at an affordable price. A doctor’s visit often has low co-pay in high deductible plans and then you would take care of any lab work through the deductible. If you anticipate lower health costs over the course of a year, these plans can save you a lot of money.

High deductible plans also allow you to meet health plan stipulations that your community may have. By having yourself and your family covered with health insurance, you can be in compliance with specific laws that require insurance coverage.

For those that are self-employed, high deductible plans allow people to purchase health insurance even though they don’t have the influence of a group negotiation rate. This helps people have a modicum of protection while working that they normally wouldn’t have otherwise because they work for themselves and not for an employer.

Are There Cons To a High Deductible Health Plan?

The primary issue with a high deductible plan is the costs that you would pay if you had a medical emergency. Ambulance services, emergency room procedures, and high end diagnostic tools would all go toward the deductible and not be covered by the plan. That could mean, for example, an emergency CT scan could cost upwards of $5,000, whereas a low deductible plan may cost less than 10% of that cost.

High deductible health plans are not always honored by local providers either. This is especially a problem for people in smaller communities with hospitals or clinics that have limited resources. You may find that initial care could be refused or that full prices may be required because your plan is not recognized by the healthcare institution.

Is Carrying a High Deductible Plan Right For You?

If you don’t anticipate a medical emergency in the coming year, then a high deductible health plan could save you money. Many people, however, are simply unwilling to gamble and will invest into a plan that offers a lower deductible for a higher monthly premium. No matter what, however, a high deductible plan will give you the coverage you need that will meet your needs, often for the right price.